The other problem with venture capital: management fees

Bill Gurley posted a really nice summary of one of the main problems with the venture capital industry, and Fred Wilson responded here.   I totally agree with their analysis, but would add one more major problem with the venture industry to the list.  The fact that most VCs get rich via “management fees” just by showing up every day.

For those who don’t know, most VC’s get paid by so-called 2 and 20.  The 2 refers to the 2% of the fund they use to cover operating expenses and pay their salaries.  The 20 refers to the (normally) 20% “carry” fee – the percent of the profits they make for their investors that they get to keep.

Now I fully support carry fees – it is very similar to equity in a startup.  VC’s should get paid when they make money for their investors.

The problem is the management fees.  2% made sense back when VC funds were much smaller, but not now that they have gotten so large.  As peHUB said in their email newsletter today, Benchmark had an $85M fund in 1995 but today has a $500M fund.  That seems to be the typical trend for most big VCs.

Let’s do a little math.  2% of $85M is $1.7M.   Assuming 8 partners, that means salaries are in the $100-$200K range.  Much higher than national averages but, by the standards of finance, they aren’t getting “rich.”  2% of $500 is $10M, so each partner is probably getting $1M+ in salaries.   Over the 10 year life of the fund that’s $10M.  Even on Wall Street that is considered pretty rich.  And they get that money even if they make only bad investments and don’t return a dime to their investors.

This is why you see VCs raising bigger and bigger funds, why you frequently hear them say things like “I need to do 2 deals this year” and, worst of all, why you often see VC’s arguing for larger round sizes even if the startup has no productive use for the additional money – and even for the same percentage ownership.   In other words, in many cases VCs argue for a higher valuation just so they can “put more money to work.” Why?  If you raise a $500M fund and tell your LPs you are going to invest it over, say, 4 years, then its pretty hard to go back to them after a year and say “thanks for the $10M in management fees, I decided not to make any investments this year.”

VC’s seem to be a big fan of performance-based compensation when it comes to startups.  They should adopt it for themselves as well.

7 thoughts on “The other problem with venture capital: management fees

  1. Pingback: Trackback
  2. Pingback: Trackback
  3. The moment making a new kitchen or renovating an existing
    kitchen, it is a good idea and a good idea to keep an open mind
    and find out everything possible – by the end of the process, it
    will definitely pay off. Here are some common myths about the design process and
    its particular results:

    “You may easily add later” -the best planning is to take into
    account and add all the characteristics of the kitchen at
    the planning and as well as or renewal stages, and not at a later stage.
    For example, in case you are not thinking about setting
    up a flat screen TV SET in the kitchen space or if
    you do not currently have a water dispenser, the best thing
    is to make for future installation of these and plan power, communication and water factors and keep the alternatives wide
    open. Also, since the kitchen is supposed to provide us for quite some time,
    it is highly recommended to measure all existing ergonomic solutions such as drawer drawers, cabinet
    style dishwashers, and so forth Even if you are
    young and fit at the moment, these additions will prove themselves Mobility as time goes on. Either way, if you prefer to deal with kitchen planning in stages – one aspect or specific area at a time – make certain to plan carefully so that everything will fit in stylistic
    and functional harmony when the kitchen will finally be complete.

    ” I do not have so many things” – whether we like it or not, your kitchen has tremendous potential for
    ruining due to multitude of items kept in it, which is why space is plenty to store, This means that there is
    a relative shortage of overhead storage cupboards, so it
    is important to balance function and style.

    “Bigger Better” – Your kitchen space is large and
    you need a sizable kitchen, but then you will find yourself
    going back and out from one machine to another, in addition to this situation, preferably in the look stages, consider adding a job sink beside the refrigerator or
    Reduce the need to cross these distances, and there is without doubt that
    these improvements mean additional costs, and if your budget is limited, it is unquestionably worthy of considering a compact kitchen.

    “I do not desire a designer ” -not every kitchen design project requires a designer, but many people need
    someone to help us see the overall picture and
    administer the work. Renting consult with an architect or designer does involve quite a lot of cost,
    but in the long run it is approximately keeping money and
    time. Even though you have a very clear picture of what
    you want, do not save the expense of a designer since it can best fulfill ideal.
    Proper and efficient planning of your kitchen and coordination between all the many professionals included in building your
    kitchen by a designer can keep your project within their
    some budget, save you unnecessary money and pointless problems and particularly keep
    your sanity.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s